The shift of manufacturing from Europe to the Far East is driving dramatic growth in deep sea container shipping which is creating a whole set of new challenges for the major shipping lines.
Meeting growing demand means increasing capacity – building more and bigger ships. It seems obvious that, if demand rises, rates should follow. But rates in the liner shipping market are notoriously volatile and margins are small, so bringing in new capacity has to be managed carefully. Bringing in too much capacity in one go can force rates down with a disastrous effect on margins.
One of the key ways in which lines were able to manage this in the past was through the conference system – essentially cartels that managed the rates on specific routes. These were given exemption from the normal European Union competition rules (Regulation 4056/86). However, now the EU has decided to end that exemption, the lines must look at alternative strategies.
Consolidation is one way forward. In fact, the past decade has seen substantial consolidation in the liner shipping market so that now the top 20 carriers account for more than 70 per cent of the containers in service and it is clear that it is the largest carriers that have been growing fastest.
Over the past year the worldwide container fleet has grown by 14 per cent to 10.9 million teu but the top five carriers have grown by anything between 20 and 100 per cent, according to figures from Liner Intelligence.
Danish group Maersk took over P&O Nedlloyd last year contributing to its 60 per cent growth and making it by far the largest carrier accounting for almost 15 per cent of the total fleet. This compares with an 8.6 per cent share for second placed MSC and 5.5 per cent for third placed CGA-CGM. However, by comparison to other markets this is still quite fragmented and it seems likely that there will be further consolidation.
Traffic from Asia to Europe has doubled over the past five years, Tom Boardley, deputy managing director of NYK Line Europe, points out. “We have had three years of 15 per cent growth.”
The task for the lines is to come to an accurate estimate of the growth and plan accordingly. “You can use long term contracts as a hedge. In an ideal world, half the business would be long term contracts and half short term,” he says. ” However, you can’t rid yourself of risk altogether.”
“This is an industry that lives on its nerves,” says Boardley. “There only needs to be a perception that there has been a slight weakening in the market for there to be a big effect on rates.”
While there is a baseline commodity price for the container movement, there is plenty of scope for shipping lines to come up with value-added offerings. “Shippers want more services,” Boardley says. NYK, for example has its “Logistics Integrator” programme which draws together the various products it offers. On the continent, for example, it offers block trains from the port to the Ruhr in Germany. And, of course, NYK Logistics has become a major player in the domestic market over the past few years.
Keeping pace with the volume growth means building bigger and bigger ships. The latest to come into service is the Emma Maersk which has a capacity of more than 11,000 teu making it twice the size of ships in service a decade ago.
NYK, which currently accounts for almost three per cent of the container shipping fleet, is being a little more conservative. It is currently building ships of 8,750 teu – still huge by all previous standards. The recent generations of large ships will not go through the Panama Canal. Ships today must be less than 32m wide and 294m long to fit through the canal’s locks. The proposed locks could handle vessels that are 49m wide and 366m long. The new locks are planned to open in 2014. Even so, it won’t be able to handle a ship of the size of the Emma Maersk which is 56m wide and 397m long.
Looking ahead, it is not the deep sea operation that causes most concern among the lines but the land-side infrastructure. “The two most important roads in the UK are the A14 from Felixstowe and A34 from Southampton,” says Boardley arguing that right across Europe we need serious investment in infrastructure – both road and rail.
Boardley also sees opportunities for the development of coastal shipping – a subject close to the heart of David Cheslin who chairs Coastlink an association of shipping companies, intermodal operators, ports, stevedores, logistics specialists and shippers.
Cheslin points out that UK imports, especially from China, are increasing faster than the main deep sea ports can grow their handling capacity. Hubbing over the continent is no longer a simple alternative so coastal shipping services could provide a solution.